But Then What

Sunday, November 23, 2008

OK. I have to put you through this one more time, at least those who have stuck with me so far.The new website is But The What. In Internet speak, it is http://www.butthenwhat.com/.

While you can click on that to get there, you can also use this LINK to get there as well.

Bookmark it, add it to your favorites, whatever so you don't lose it. I am not moving again. Also you probably need to add it to your feed reader if that's what you use. There is also an email feature if you want to get the posts emailed to you.

Ok, this is something of a blockbuster. Here's the latest from the WSJ:

The federal government agreed Sunday to take unprecedented steps to stabilize Citigroup Inc. by moving to guarantee close to $300 billion in troubled assets weighing on the bank's books, according to people familiar with details of the plan.

Treasury has agreed to inject an additional $20 billion in capital into Citigroup under terms of the deal hashed out between the bank, the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corp. Treasury officials will charge a higher interest rate for the capital injection -- 8% for the first few years -- than it has charged to dozens of other banks now borrowing money under the government's the $700 billion rescue package approved by Congress last month.

In addition to the capital, Citigroup will have an extremely unusual arrangement in which the government agrees to backstop a roughly $300 billion pool of its assets, containing mortgage-backed securities among other things. Citigroup must absorb the first $37 billion to $40 billion in losses from these assets. If losses extend beyond that level, Treasury will absorb the next $5 billion in losses, followed by the FDIC taking on the next $10 billion in losses. Any losses on these assets beyond that level would be taken by the Fed.

Citigroup would also agree to work to modify -- if possible -- troubled mortgages held in the $300 billion pool, using standards created by the FDIC after the collapse of IndyMac Bank.

The government is not expected to require any management changes, as that was seen as potentially being too destabilizing.

Let's parse this.

The government agrees to go on the hook for another $300 billion. Out-of-pocket is $20 billion that goes to shore up Citi's capital without as so far reported any equity for the government. Citi takes the first loss on the guarantee of assets in an amount of $37 billion to $40 billion (don't you like the way we throw around a billion dollars or so?) and then various parts of the government pick up the rest with the Fed eating the lion's share. Citi gets charged a modestly higher rate of interest, but nowhere market, for the new capital and the government doesn't demand any management changes for fear of destabilizing...what? Oh, and by the way, Citi is genuflecting at the altar of mortgage modifications.

Here's what we don't know. What assets are we guaranteeing and how does that guarantee kick in and require real money? Why is there a $3 billion gap in what Citi has to absorb as a loss? Why the fig leaf of parcelling the losses out among various parts of the government and why is the Fed involved at all in the loss sharing arrangement? And finally, why do the people that negotiated this think that changing management could possibly be anymore destabilising than the current situation.

This is lunacy. Just take the bitch over (excuse the language) and be done with it. Investment bankers erecting incredibly complex financial castles on sand are to a large part to blame for this situation and now they seem intent on transferring that skill to the public sector. This is nothing more than an artifice designed to camouflage a failed bank.

Yahoo news (sorry about that) quotes some Obama advisers as saying they aren't going to wait for the inauguration to engage the economic problems. This sounds to me like the first mistake he has made.

A cardinal rule of those in waiting is not to engage until you can control events. The Obama team isn't there yet. Moreover, they are acting without complete information and that is always a dangerous position in life or politics. This is still a political game and the Republicans still control the White House. Bush is said to be working hard to insure a smooth transition but don't be surprised if some other officials in the administration aren't setting the Obamites up for an embarrassing gall.

FDR eschewed all attempts by Hoover to draw him during the interregnum. Obama should have learned from that.

That didn't take long. Here is a WSJ article that reports the government is indeed discussing the purchase of some of Citi's toxic assets.

While the discussions remain fluid and might not result in an agreement, talks were progressing Sunday toward creation of what would essentially be a "bad bank." That structure would help Citigroup cleanse its balance sheet of billions of dollars in potentially toxic assets, these people said.

The bad bank also might absorb assets from Citigroup's off-balance-sheet entities, which hold $1.23 trillion. Some of those assets are tied to mortgages, and investors have worried such assets could cause heavy losses if they land on the company's balance sheet. Citigroup also has about $2 trillion in loans, securities and other assets on its balance sheet as of Sept. 30.

Behind the push is a broad effort to shore up faith in the New York company, which saw its stock price tumble by 60% last week to a 16-year low.

Under the terms being discussed, Citigroup would agree to absorb losses on assets covered by the agreement up to a certain threshold. The federal government would cover losses beyond that level, people familiar with the matter said. One person said the new entity is expected to hold about $50 billion of assets.Itwould seem that Paulson's plan to put the balance of the TARP funds on the shelf until the next administration arrives has changed yet again.

So where do we go from here. If the AIG saga provides any guidance, the amount of aid to Citi will most likely grow. More to the point, who is next. Citi doesn't have an exclusive on the ownership of junk. This buys Citi some time but why won't the markets train their sites on Bank of America, JP Morgan, a large swath of the European banking community as well as smaller banks. Indeed, this might well throw the whole system into turmoil as it seems to be an admission that the original recapitalization via the TARP was less than what the system needs.

With Watergate it became political gospel that you can survive the scandal but the cover up will kill you. We may be finding a corollary to that when it comes to bank resuscitations. It might well be that half measures fool no one and inevitably lead to what you hoped to avoid.

I haven't been able to confirm this but Calculated Risk is reporting that the government is set to buy up to $100 billion of assets from Citi to keep it afloat. Treat this report with caution as CNBC, the source for Calculated Risk, has been off base before.

Senator Charles Schumer said today that the Obama recovery plan announced on Saturday would likely run into the range of $500 billion to $700 billion. Schumer said, "To make this work you need five per cent of GDP." It's a little like a new New Deal, but you do it before the Depression occurs, not after."

It's not surprising to see this thing growing like Topsy. As I said last night in my post, I still want someone to tell me where this money is going to come from.

About Me

I'm just a guy with a lot of interests who discovered blogging about ten months ago and became addicted. Mostly I write about business and finance, sometimes about real estate and often about how politics and business collide. Enjoy the blog and tell me what you think.